What is Foreign Tax Credit ?

The Foreign Tax Credit (FTC) is a tax relief mechanism that helps taxpayers avoids double taxation on income earned in foreign countries. When an individual or business earns income outside their home country, they may be subject to tax in the country where the income is earned as well as in their home country.

Foreign Tax Credit is a provision that allows taxpayers to offset income taxes paid to foreign governments against the domestic taxes they owe, thereby reducing their overall tax liability.

Benefits

  • Reduces Tax Liability : Offsets the amount of tax owed in the taxpayer's home country by the amount of tax paid to foreign governments.
  • Avoids Double Taxation : Ensures that income is not taxed twice by different jurisdictions, making it fairer for taxpayers who earn income internationally.
  • Encourages International Business : Facilitates international business and investment by reducing the overall tax burden on cross-border income.

Process / Steps

01

Document Foreign Income

Maintain detailed records of all income earned from foreign sources.

02

Document Foreign Taxes Paid

Collect receipts, tax returns, and other proof of taxes paid to foreign governments.

03

File Appropriate Forms

Complete and submit necessary forms with the domestic tax return to claim the FTC (e.g., Form 67 for Indian taxpayers).

04

Comply with Regulations

Ensure compliance with both foreign and domestic tax laws to correctly claim the credit.

Documents required

  • Foreign Tax Return : Copies of tax returns filed in the foreign country.
  • Proof of Foreign Tax Payment : Receipts or bank statements showing payment of foreign taxes.
  • Income Statements : Detailed statements of income earned abroad (e.g., salary slips, dividend statements).
  • Form 67 (for Indian taxpayers) : A mandatory form to be filed with the Indian Income Tax Department to claim the FTC.
  • Foreign Tax Assessment Notices : Notices from foreign tax authorities confirming the amount of tax assessed and paid.
  • Supporting Documentation for Income : Employment contracts, business agreements, or other documents proving foreign income.
  • Double Taxation Avoidance Agreement (DTAA) : Copy of the DTAA between India and the foreign country, if applicable.
  • Foreign Bank Account Statements : Statements showing the credit of foreign income and payment of foreign taxes.
  • Certificates of Residency : Certificate of residence in the foreign country, if required by the foreign tax authority.
  • Additional Documentation : Any other relevant documentation specific to the taxpayer’s foreign income and taxes.

Our Support?

  • Accuracy : We ensure precise calculation and documentation of foreign taxes and credits, minimizing the risk of errors.
  • Convenience : Our team manages the entire FTC process for you, handling all paperwork and interactions with tax authorities, saving you time and effort.
  • Peace of Mind : We guarantee compliance with international and domestic tax regulations, helping you avoid penalties and ensuring that you receive the maximum tax benefit available.

SS Auditors Foreign Tax Credit services are designed to help clients navigate the complexities of international taxation, ensuring they maximize their tax benefits while remaining compliant with all relevant tax laws.

Frequently Asked Questions

Individuals or businesses who pay or accrue taxes to foreign governments on income also taxable in their home country.

Based on foreign taxes paid, limited to the domestic tax liability on the same foreign income.

Includes wages, salaries, dividends, interest, royalties, and business profits earned abroad.

File the appropriate forms with your domestic tax return (e.g., Form 67 in India).

Excess amounts may be carried forward to future years but are not typically refundable.

Yes, you can claim FTC for taxes paid to multiple countries, with each considered separately.

Yes, the FTC is limited to the domestic tax liability on foreign income and may have specific caps.

The DTAA influences FTC calculations by outlining how foreign income should be taxed and can impact the credit amount.